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Friday, August 18, 2006

Tata Motors to float IPOs for 2 arms

India’s largest commercial vehicle maker, is learnt to be working on an initial public offering, IPO for two of its group companies - HV Axles and HV Transmissions - as part of a larger corporate restructuring programme and to also tap alternate options of raising resources to part-finance expansion plans, reports The Economic Times.

According to sources, senior company officials have already begun the process by meeting with investment bankers. The IPOs for the two wholly owned subsidiaries of Tata Motors are likely to be scheduled by the end of the current fiscal year.

It has been learnt that Tata Motors is also considering strategic partners for both the companies and may look at selling part of its stake in HV Axles and HV Transmissions, before the proposed IPO.

The sources indicated that Tata Motors was in talks with major global companies such as Automotive Axles and Arvin Meritor for a strategic alliance.

Tata Motors MD Ravi Kant had said that his company was examining all options “that could enhance the contribution from our subsidiaries.” He declined to elaborate. When contacted, a spokesperson said: “Tata Motors is open to considering options of strategic partners or IPOs for these two subsidiaries to unlock value in these companies. But, the company has not set any time-frame.”

The stake sale is expected to help the company in price discovery and also extend the two companies’ clientele. Both HV Axles and HV Transmissions were spun off Tata Motors’ commercial business unit in ’00. The two companies supply components only to their parent company Tata Motors.

According to analysts, based on FY08 earnings and a price-earning multiple of 12, the total value of Tata Motors’ stake in HV Axles and HV Transmissions could be in the region of Rs 773 crore (Rs 7.73 billion) and Rs 453 crore (Rs 4.53 billion) respectively.

In a recent report, Motilal Oswal Securities said Tata Motors would benefit from the significant value creation in its subsidiaries. “We value its subsidiaries at Rs 181 per share (applied 20% discount to actual valuation). We value the core business at 15.5 times forward earnings,” the brokerage had said after Tata Motors posted its fiscal first quarter results. The sources said that Tata Motors is likely to use the stake sale and IPO funds for its capex plans.

The company is planning an expenditure of Rs 10,000 crore (Rs 100 billion) in the next 2-3 years of which Rs 2,000 crore (Rs 20 billion) will go toward its expansion, while the remaining Rs 8,000 crore (Rs 80 billion) would be allotted for daily operations and development of new products.

The move is likely to be welcomed by the market. “There is an increasing trend among major corporates to explore ways of raising funds to meet their capex plans, especially as interest rates are going up,” said SP Jain, chairman of Mumbai-based brokerage Networth Stockbroking. “Any kind of value unlocking where the market participates, the parent company will automatically benefit.”

The market has already been reacting to possible IPO news from Tata Motors. Shares of Tata Motors have been rising steadily in the past one-month, surging 22% to end at Rs 837 a share on the Bombay Stock Exchange on Thursday.

Both the companies have posted improved earnings. HV Axles reported a 57% growth in its revenue in the first quarter of the current fiscal at Rs 42.4 crore (Rs 424 million), while net profit surged 84% to Rs 14.3 crore (Rs 143 million). HV Transmission ended the first quarter with a 43% growth in revenue at Rs 37.4 crore (Rs 374 million), and a 78% increase in its profit at Rs 9.7 crore (Rs 97 million).

HV Axles and HV Transmissions were formed in March ’00 and they acquired Tata Motors’ heavy axle division and gear box division at Jamshedpur, respectively. HVAL has an equity capital of Rs 45 crore (Rs 450 million) while HVTL was started with an equity capital of Rs 40 crore (Rs 400 million).

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